The pensions industry breathed a sigh of relief when the Minister for Finance announced during his Budget speech on 5 December 2012 that “s it is in everyone’s best interest the Government wishes to encourage as many citizens as possible to continue to invest in pension schemes”.  Budget 2013 contains a limited number of pension-related changes which, broadly speaking, have been positively received.   

Pension-Related Measures

The Minister announced the following pension-related measures as part of Budget 2013:No change in pensions tax relief

• No change in pensions tax relief
  Marginal rate tax relief continues to be available on personal contributions made to pension plans.
• Changes to maximum allowable pension fund
  Tax relief on pension contributions will be capped on pension schemes which deliver an income of up to €60,000 per annum with effect from 1 January 2014. As yet, very little detail is known as to how the €60,000 pension cap will operate in practice. A key issue is how the maximum allowable pension fund at retirement for tax purposes (the Standard Fund Threshold) will be calculated (e.g. what multiplying factor will be used and whether index-linking will apply).  Further analysis will be required when details are published in the next Finance Bill, expected to be published early this year.   
• No change in taxation of retirement lump sums
  The €200,000 maximum tax-free lump sum that can be taken from a pension arrangement on retirement has not been changed.
• End of pension levy in 2014
  The four-year 0.6% pension levy will cease after 2014.
• Early access to AVCs
  Members who have paid additional voluntary contributions (AVCs) to their pension scheme will now be able to draw down up to 30% of their AVC value before retirement age. This option to withdraw will be available for a three-year period, and withdrawals will be subject to income tax at the member’s marginal rate.

Comment

The retention of existing tax relief on pension contributions, as well as the existing maximum tax-free lump sum, is very welcome. Confirmation of the ending of the pension levy in 2014 is also very helpful, and the AVC early draw down option may be attractive to some people. These measures give greater certainty and are a boost of confidence for pension providers and savers alike.

It is estimated that approximately 27,000 people could be affected by the Government’s plan to cap tax relief from 2014 on pension schemes which deliver an annual retirement income in excess of €60,000.  The penalty for exceeding the €60,000 cap is likely to be a 41% charge on any amount over €60,000, on top of the payment of income tax and the Universal Social Charge. This could result in a net effective tax rate of approximately 70%. Consequently, employers are advised to look at their benefit structures and consider ways to restructure employees’ remuneration in order to avoid a penal tax on employees. 

Contributed by Lorna Osborne & Mary Greaney